Importance of Incentives in the Book Freakonomics - Essay Example

Stephen D. Levitt and Stephen J. Dubner attempt to do something challenging in their book Freakonomics: A Rogue Economist Explores the Hidden Side ofEverything; they wish show people how seemingly unrelated events are intrinsically intertwined and how seemingly related events are completely irrelevant in regards to each other. A main issue that they take is to state that what is generally called conventional wisdom is in almost all cases misleading and can keep people from discerning correct information. To show how this is, the authors show how incentives are an extremely important facet of modern life, how small events can have large effects, how experts use information to their advantage, and how knowing how to properly measure and gauge can lead to a greater understanding of the hidden effects of economics and the world in general. First, the authors illustrate how incentives work. In the view of the authors, the modern capitalist world and economics in general function based on incentives. The key to incentives is to always attempt to discern how exactly they affect people and to what extent. By doing so, people are able to maximize whatever profits they are looking to make. The example that they use is of real-estate agents. As the authors explain it, it is not typically in real-estate agents best interests to put the amount of effort into selling a house for the absolute best price possible because the amount of their commission won’t be significantly higher for the amount of effort it would take to do so. We can see how specifically this is true by examining how real-estate agents behave when selling their own houses. Actually, this is one exercise that the authors go back to time and time again; in order to determine whether or not an expert in a particular field is in fact serving your best interests. This might seem to be the most obvious way to approach something, but it is a practice that is highly effective and that people don’t generally utilize. As people generally tend to be self-interested for the most part, and people with a specialty in a specific field will obviously take advantage of this specialized knowledge, obviously people are going to take advantage and utilize this knowledge to maximize their profits. The key then is to compare how experts act in their own affairs compared to when they are acting in the interests of other people. The authors demonstrate this point by showing how houses being sold by real-estates agents for other people stay on market for shorter amounts of time than houses that are being sold by real-estate agents for themselves. Because the incentive is not worth the extra effort for real estate-agents to find the absolute best price possible, as opposed to taking the first worthwhile offer, they are not going to put the effort into doing so. I feel that this is a rather obvious point to make, but as the authors state, people don’t often think about this sort of thing in everyday life. Even though it might seem obvious, the point that the authors are making is that not enough people really utilize this sort of knowledge. The key to incentives is to figure them out and then determine how to make them work in your advantage. Another aspect of economics that the authors discuss is how small events can have large effects. For instance, the authors state that the Roe Vs. Wade decision back in the 70’s was the defining factor in the drop in rising crime rates in the 90’s. While at first these two factors might not seem to have anything in common initially to people who are not putting much thought into it, the authors demonstrate how sensible this answer to why crime rates dropped actually is. The first part of this to think about is from which population violent criminals tend to come from. The answer to this question is that people in poor economic conditions generally are the people who become violent criminals. There are statistics to back this statement. The next thing to do is to consider who the largest population of people seeking abortions tend to be. Again, according to statistics people in poor economic conditions have higher rates of unwanted or unplanned pregnancies. However, when Roe Vs. Wade made abortions a viable option for those facing economic difficulties. Thinking about things this way, it is a simple step to state that Roe Vs. Wade allowed for the thinning out of the criminal population. The people who were going to grow up and become violent criminals never had a chance to because they were never born. The seemingly small event of Roe Vs. Wade, which in itself wasn’t actually a small event considering all of the ramifications it had, became an even bigger event as it caused something as dramatic as the drop in serious and violent crime. For example, one thing to think about is the relation of x and y, such as x being the rate of violent crime and y being the number of police officers in a given city. Obviously these two factors are going to be related, but what is not obvious is going to be exactly how the two affect each other. As an example of mistaken thinking in matters such as these, the authors mention a story about an emperor ordering the execution of the guards in a town with the highest crime rate. The crime rate was the highest in the empire, and so the number of guards was going to be the highest. Obviously the high number of guards was a response to the high crime rate, as opposed to the high crime rate being a response to the high number of guards. These are the sorts of things that the authors are encouraging the reader to think about. X and Y might be related in some way, but what we are needing to do is to discover how they are related. In economics there is very rarely a case of a simple X causes Y and Y causes X in return. Often times both of these factors might be caused by Z, or any other number of factors. While mathematics might have linear and equal cause and response in regards to equations, economics forces people to examine causes and effects in a much more in depth manner, and this is exactly what the authors are attempting to prove. Z, with Z being Roe Vs. Wade, caused X or violent crime, and X caused Y or an increased police force. This book attempts to cause us to rethink much of what we take for granted, and through its sensible and easy to follow examples, it accomplishes just that. Economics is all about information, and what we need to understand is that not all information is correct. Incorrect information is obviously detrimental to the goals of an economist. The book attempts to equip people with the tools to weed out incorrect information and determine the best ways to use that information. Even though it might seem like it is making some outrageous claims, the book makes a lot more sense than what is often referred to as conventional wisdom, ideas which are so common that they are considered to be necessarily true. Read More